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The concept that you have to understand first is that there is a fundamental difference between trading and investing. Public opinion says that these two things have the same substance, but under the parable is expected to give an idea of the differences between them.
You buy a house with an intention to keep the property as a capital and to earn passive income. For that, you rent out the house to the needy.
Over time, the value of the house has generally increased and at the same time you also gain additional income from renting the house annually.
This principle is fundamentally different to trading. Trading in the above example will apply when you buy a house to resell it at a decent price, and profits will be derived from the difference between the purchase price and sales.
Both (investment and trading) has a similar way and can be mutually beneficial, but from the above example we can draw conclusions about the characteristics that set it apart.
The Finance World
Investments in financial instruments adheres to the same principle, by buying assets such as stocks, you will have capital gains when the share price rose, while passive incomenya is the dividends.
The first risk arising from these investments is the need for a counter party. In other words, every time you want to buy an asset, there must be other parties that sell. On the other hand, when you want to sell the assets back, there should also be those who are willing to buy.
Counter party risk presented itself when prices change rapidly, for example, declined. You will have trouble finding a buyer.
The next risk is the potential for partial fills where only a part of your assets are sold.
Assets above can also be applied in the concept of trading, with the counter-party risk level is lower, even though the product is the same. It's just that you cannot take advantage of a moment of drastic declining prices. Because short selling has strict regulations and in several countries including Indonesia, it is entirely prohibited.
Derivatives / Futures
Meanwhile, in other parts of the financial world, there is a trading facility that addresses the various shortcomings mentioned above. Which guarantees liquidity fully implemented, both in terms of price increases and decreases, as well as the number of traded assets.
In the financial world, there are derivative products and futures products that meet the above criteria are traded on the exchange itself. There are many advantages that can be exploited from trading in futures exchanges. Advantages that should be listened to, among other things:
Investment period has long range and binding until it reaches the ideal level of profit. While the trading preiod of time projected only within a fiew months. An investor who bought land on the location of promising from an economic standpoint, still requires a relatively long time to wait for land prices rose to an ideal. More efficient use of time can be found in the trade futures products, as traders can change the trading period by using a shorter timeframe. Range time frame can be adjusted up to 5 minutes or even 1 minute.
In the world of investing, trading or investment liquidity meaning how much of the market available to absorb the products traded (the ratio of the number of sellers and buyers). The higher the liquidity, the more easily the trading process can be carried out. Low liquidity brings difficulties for sellers to find buyers. Stock futures have very quick and liquid transactions, run online and can execute transactions wherever you are, without queuing and without partial fill. In addition, you can also directly to sell without having to be bothered by any delay or bureaucratic processes. These things can be done anytime during the trading session.
3. Potential Advantages
In traditional investments, there was no capital-based facilities leverage as full. Leverage is a service for investors to purchase a trading instrument by simply removing a small portion of the capital investment /price of the instrument. In trading derivatives /futures (further details can be seen in the next article), a futures trading instruments can be purchased at 10% of the capital value of the instrument, there is even a product that can be purchased by simply removing 1% of the capital value of the instrument.
Parable of the use of leverage trading, can be seen in the following example of a story. If you buy land in the 'elite' capital worth USD 1 Billion, and after one year later when the price reaches Rp1.1 billion, you also sell the asset so as to produce a profit of Rp 100 million. The Return On Investment (ROI) will be: Rp.100.000.00, - / Rp.1.000.000.000, - x 100% = 10%.
You can compare it to the potential that can be achieved through the trading of derivative products based on the following example. You buy 100 troy ounces of gold at a price of $1,000 per troy ounce, bringing the total value of your investment is $100,000 (100 troy ounces x $1,000). However, due to the use of leverage, the capital you need to implement this purchase is only $ 10,000. Next, you sell the gold at a price of $1.100 per troy ounce. From this transaction, you earn a profit of $ 10,000 ($ 100.00 x 100 troy ounces). Your ROI calculation is as follows:
$ 10,000 / 10,000 x 100% = 100% of the value of our investment.